For some investors, mid-cap stocks are a perfect hunting ground for stocks to buy. Small-cap stocks offer more volatility — and generally have underperformed in this bull market. Large-cap stocks often have so much coverage that finding a real buying opportunity is difficult.
So mid-cap stocks — defined here as those with a market capitalization between $2 billion and $10 billion — offer a nice balance. The companies are large enough to own significant market share, and provide steady performance. They can be small enough to, on occasion, dip below the market’s radar.
Among the 1,000-plus mid-cap stocks on U.S. markets, these 10 look like potentially the best stocks to buy. They span different industries — and have very different risk/reward profiles. But all 10, at the least, have a strong bull case.
To be clear, marijuana producer Tilray (NASDAQ:TLRY) is not for the faint of heart. It may not even be a buy just yet, as the chart of TLRY stock is a classic falling knife.
This, after all, is a stock that looked like a bubble less than a year ago. TLRY stock went from $20 to $300 in a matter of weeks. Since then, shares have done nothing but fall.
That crazy trading likely colors Tilray stock in the mind of some investors. And with cannabis sentiment clearly negative, particularly among the larger names, it continues to be the victim of a steady sell-off. A Q2 report this month that investors took as disappointing certainly didn’t help.
But as I wrote after earnings, there’s actually an interesting strategic play here. Tilray is staying patient, focusing on cannabis derivatives instead of producing flower whose price it believes will eventually crater. Given plunging prices in legalized U.S. markets like Oregon and Colorado, that strategy makes some sense.
Again, the chart here is ugly, and patience might be advised. Investors skeptical of cannabis growth should look elsewhere. But even investors intrigued by the space seem to see Tilray as some sort of fly-by-night pump stock after last year’s bubble. It’s not. And at some point, TLRY stock will bottom — and could see a nice rebound.
CyberArk Software (CYBR)
There aren’t a lot of growth stocks to buy in the mid-cap stocks space at the moment. Some of the best stories in recent years — think Shopify (NYSE:SHOP), Roku (NASDAQ:ROKU), or The Trade Desk (NASDAQ:TTD) — have been discovered, and their market caps have moved above $10 billion.
Meanwhile, with many markets ‘winner take most’, those growth stories that aren’t the best stories simply may not be attractive. A software stock, for instance, that is second or third in its market usually isn’t a true growth stock.
But CyberArk Software (NASDAQ:CYBR) seems like an exception. As Will Healy detailed in January, CyberArk has a solid niche in the growing cybersecurity space. Revenue growth of 21% in 2017 accelerated to 31% last year, and CyberArk is guiding for a 22-23% increase this year on top of that strong comparison.
At 43x 2020 EPS estimates, CYBR stock isn’t necessarily cheap. But that figure drops below 40x backing out the company’s $13 per share in cash. And a recent 23% pullback from late July highs makes the price more attractive. That decline came in part due to Q2 earnings earlier this month — yet the report looked strong, with a guidance hike.
That selloff comes in a market where investors still see growth plays as stocks to buy almost no matter the valuation. If CYBR gets that treatment again, the upside from current levels could be enormous.
Columbia Sportswear (COLM)
There also aren’t a lot of ‘set it and forget it’ consumer plays in the mid-cap space — or the market at all. Retailers, save for the biggest companies, have been hammered. Suppliers face risk as well, as fragmented markets mean smaller companies can take share.
But through that noise, Columbia Sportswear (NASDAQ:COLM) just keeps performing. Columbia is coming off a second quarter report in July where it crushed earnings estimates and raised full-year guidance. Yet it trades at just 18x the midpoint of that guidance, backing out net cash.
This indeed seems like a ‘set it and forget it’ play. It’s well-managed. The Columbia brand has real value. The need for outdoor wear is unlikely to decline. And the combination of a reasonable valuation and strong growth provides a compelling entry point below $100.
JetBlue Airways (JBLU)
Airline stocks like JetBlue Airways (NASDAQ:JBLU) can be difficult investments. Warren Buffett of Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B) famously ignored the space for years before entering the sector in 2016.
Buffett’s prior logic was that airlines had too much cyclical exposure, capital needs that were too intensive, and too often went bankrupt. Those worries still cloud the space: most airline stocks, including JBLU, are quite cheap on an earnings basis as investors discount the impact of a potentially looming recession.
So anyone even considering an airline stock has to have some faith in the U.S. macro picture. But as far as the sector goes, JBLU looks like the best choice. It has the lowest international exposure — and thus the biggest reliance on an American economy that is leading the world at the moment. As an analyst noted this week, its costs are under control, and its valuation on a P/E basis is well below historical averages.
To be sure, JBLU stock probably will always look cheap. And it’s traded sideways for years now. But at the low end of that range, and at just 7x 2020 EPS estimates, JetBlue stock might finally be too cheap.
HD Supply (HDS)
Industrial distributors like HD Supply (NYSE:HDS), too, are being discounted for cyclical reasons. But even in that context, HDS stock looks too cheap.
HDS trades at less than 11x the midpoint of FY19 EPS guidance. Admittedly, the company did cut that outlook after Q2 results, with weather and some one-time issues a factor. But this is a company still growing revenue at a sharp clip, with sales guided to increase roughly 7% this year.
In other words, HD Supply is growing in line with other plays like Fastenal (NASDAQ:FAST) or MSM Industrial Direct (NYSE:MSM) — yet it’s valued at a discount. Here, too, investors bullish on the U.S. economy have an attractive option at a reasonable valuation.
Scotts Miracle-Gro (SMG)
There are two big worries with Scotts Miracle-Gro (NYSE:SMG). The first is that the easy money has been made. The second is that it looked the way before, too — and SMG stock promptly plunged.
Indeed, SMG stock soared to an all-time high in 2017 on the back of cannabis optimism. Two acquisitions had positioned the company to be a key supplier to the industry.
But execution was lacking. Scotts Miracle-Gro’s CEO even held an expletive-laden conference call to express his frustration with the marijuana-facing Hawthorne unit.
Since then, however, Scotts Miracle-Gro seems back on track. And the stock reflects that: SMG shares have risen 74% so far this year. Some of that increase is coming from better execution. But some might be coming from increasing optimism that a stronger Hawthorne unit can better benefit from cannabis growth in Canada and the U.S.
And that is a risk, particularly with SMG trading at 24x the midpoint of FY19 earnings guidance. But there also are huge growth opportunities here, both in the cannabis space and in the traditional lawn care category. If Scotts can take advantage of those opportunities, the stock can move higher. And recent performance suggests that it will.
Mohawk Industries (MHK)
Shares of Mohawk Industries (NYSE:MHK) just bounced off a six-year low – and perhaps for good reason.
The company’s own CEO called the environment “difficult” in the company’s Q2 release in July. Luxury vinyl tile (LVT) is an opportunity for Mohawk — but also a challenge, as it cannibalizes existing sales in ceramic and porcelain tile.
But there’s a case to buy the dip here. Mohawk isn’t terribly leveraged, with debt-to-EBITDA under 2x even after disappointing first-half results. P/E is under 11x. LVT start-up costs are hitting earnings now – but that category should at some point should turn from a headwind to earnings to a tailwind.
In an environment where housing-related stocks have rallied after an ugly 2018, MHK has been left out. That should reverse — if the company can capitalize on the LVT opportunity.
Penn National Gaming (PENN) and Boyd Gaming (BYD)
The U.S. economy remains strong. Earnings are still growing. The legalization of sports betting isn’t quite the boost to profits that some investors might think — as executives at both companies have pointed out — but it still should drive higher visitation and provide help to hotel and food & beverage revenue.
And yet, shares of domestic casino operators keep falling. PENN shares touched a two-year low in August. BYD is down 40% from early February highs.
Here, too, investors need to trust the macro environment. Casino stocks are notoriously cyclical — and that goes double for Penn National, who has leased most of its properties to REIT Gaming & Leisure Properties (NASDAQ:GLPI).
But high risk also implies high reward – and both stocks can soar. Valuation, in terms of both P/E and EV/EBITDA, is cheap. Demand remains strong. Competition from new U.S. states is likely to be minimal, with no new major markets on the horizon. Both companies can pay down debt and, in the case of Boyd, pay dividends as well. There’s a lot to like — if the external environment cooperates.
American Eagle Outfitters (AEO)
The case against a mall-based retailer like American Eagle Outfitters (NYSE:AEO) is easy to make. Mall traffic continues to decline. The shift to ‘omnichannel retailing’ may work for the likes of Walmart (NYSE:WMT) and Target (NYSE:TGT), for smaller subscale specialty retailers simply results in lower margins and smaller earnings.
But American Eagle isn’t your standard mall retailer. The legacy nameplate continues to drive positive same-store sales and solid online growth, a combination few of its rivals can match. Meanwhile, its aerie unit continues to take market share from L Brands (NYSE:LB) unit Victoria’s Secret.
There’s not much reason to see either of trends ending any time soon. American Eagle’s denim business is benefiting from a resurgence in that category. Weakness at rival Abercrombie & Fitch (NYSE:ANF) and Aeropostale suggests market share gains should continue. Aerie continues to post double-digit growth in same-store sales. Its positioning as an ‘honest’, body-positive brand against Victoria’s Secret’s ‘angels’ should continue to drive even more market share capture.
And yet, AEO stock has been dragged by a market selling anything related to malls — including operators like Simon Property Group (NYSE:SPG) and Macerich (NYSE:MAC). While there’s some logic to the bearish sentiment, American Eagle has proven itself to be an outlier. At less than 10x forward earnings, and with a 3.2% dividend yield, it’s not being treated as such. When that changes — and it should — AEO stock will prove to be one of the best stocks to buy out there.
As of this writing, Vince Martin has no positions in any securities mentioned.